Earth Beauty, Inc. is a C Corporation and is owned equally by Bruce and his daughter Isabel.

Each holds $1,000$ shares in the company.

Bruce wants to retire from the company, and it was decided that the company will redeem all $1,000$ of Bruce's shares for $$25,000$ per share on December $31$ of this year.

Bruce's tax basis in each share is $$500.$ Earthy Beauty, Inc. has current E&P of $$1,000,000,$ and accumulated E&P was $$5,000,000$ at the beginning of the year.

Instructions

Prepare a $3-5-$page memo for Michelle summarizing:

What must Bruce do to ensure that the redemption will be treated as an exchange?

If Bruce remained as the chair of the board after the redemption, what are the amount and character of income $($capital gain or dividend$)$ that Bruce will recognize this year?

If Bruce treats the redemption as a dividend, what happens to the stock basis in the $1,000$ shares redeemed?

Isabel would like to have Bruce stay on as a consultant after all his shares are redeemed. Earth Beauty, Inc. would pay Bruce a modest salary of $$500$ per month. Isabel wants to know if there is any de minimis rule such that Bruce would not be treated as having retained a prohibited interest in the company because the salary is so small. Consult Lynch v$.$ Comm'r, $801$ F$\mathrm{.}2$d $1176(9$th Cir. $1986),$ reversing $83$ TC $597(1984)$; Seda, $82$ TC $484(1984)$; and Michael N$.$ Cerone, $87$ TC $1(1986).$